Lecture 15

Lecture 15 - Econ 102 Fall 2008 Lecture 15 Monetary Policy...

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1 Econ 102 Fall 2008 Lecture 15 Monetary Policy
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2 Topics Inflation History in the U.S. How monetary policy works Why isn’t it working today?
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3 Inflation How does inflation affect the economy? What causes inflation? How can there be stagflation?
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4 Money Take the Keynesian Search model and add money Many real equilibria – many possible inflation rates Contrast this with natural rate theory t t t Y M i = Demand for Money
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5 The History of Inflation: 49-69 0.0 2.0 4.0 6.0 8.0 10 59 60 61 62 63 64 65 66 67 68 69 Price Inflation Panel B: 1959-1969 Percent per year 0.0 2.0 4.0 6.0 8.0 10 49 50 51 52 53 54 55 56 57 58 59 Price Inflation Panel A: 1949-1959 Inflation 49-59 Inflation 59-69
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6 The History of Inflation: 69-89 80 81 82 83 84 85 86 87 88 89 Panel D: Price Inflation, 1979 -1989 Price Inflation 0 2 4 6 8 10 69 70 71 72 73 74 75 76 77 78 79 Panel C: Price Inflation, 1969 -1979 Percentage per year Inflation 69-79 Inflation 79-89
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7 The History of Inflation: 1989- 2004 Inflation 1989-2004 0 2 4 6 8 10 1990 1992 1994 1996 1998 2000 2002 2004 Price Inflation Inflation has been under control again since 1989
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8 2 4 6 8 10 12 0 55 60 65 70 75 80 85 90 95 00 Price inflation William Mc C. Martin Jr. Miller Alan Greenspan Paul Volcker Arthur Burns Oil goes from 4$ to 10$ a barrel Oil goes from 17$ to 25$ a barrel Inflation History
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9 What the Fed thinks its Doing The Fed believes in the natural rate hypothesis It thinks that removing inflation is costly because expectations have inertia
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10 Aggregate Demand 1 s t t Y p λ = Aggregate demand depends on the value of the stock market
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11 Aggregate Demand Expenditure in Dollars Employment in man hours 1 s t t Y p λ =
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12 Aggregate Supply 1 t t t Y w L b = Aggregate Supply depends on employment and the money wage.
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Lecture 15 - Econ 102 Fall 2008 Lecture 15 Monetary Policy...

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